Risk Appreciation and Assessment Principles

These flashcards cover key concepts, definitions, and principles related to risk appreciation and assessment, as outlined in the lecture notes.

Frequency

The probability of occurrence of the adverse event causing a loss.

Severity

The amount of loss incurred if the adverse event occurs.

Objective probability

The relative frequency with which an event occurs in the long term, based on the hypothesis of an infinite number of independent observations.

Subjective probability

A personal estimate of the probability of loss.

Risk exposure mapping

A visual representation to classify risk exposures based on their frequency and severity.

Valuation of consequences

Measuring risk in terms of frequency and severity using probability theory and related models.

Jensen's inequalities

Mathematical expressions showing the relationship between expected values of functions of random variables and their expected value.

Central limit theorem

Indicates that the sum of a series of random variables tends to a normal distribution as the sample size increases.

Utility function

A function that represents the preferences of an agent regarding uncertainty.

Risk premium

The amount an agent is willing to pay or accept for coverage against a risk.

Value-at-risk (VaR)

A standard measure used to assess the potential loss in a portfolio.

Expected shortfall

The expected loss on days when there is a loss beyond the value-at-risk threshold.

Maximum loss

The maximum amount of potential loss from a risk exposure.

Covariance

A measure of the joint variability of two random variables.

Correlation

A statistical measure that expresses the extent to which two variables are linearly related.

Discrete random variable

A random variable that can take on a finite number of distinct values.

Continuous random variable

A random variable that can take on any value within a given range.

Risk aversion

A preference for certainty over uncertainty, leading to lower risk-taking.

Expected utility criterion

A decision-making criterion based on maximizing expected utility rather than expected value.

Risk assessment principle

Guidelines for evaluating and defining potential losses associated with risk exposures.

Probability distribution

A mathematical function that provides the probabilities of occurrence of different outcomes.